Uncertain Fiscal Consolidations

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Abstract

The paper explores the macroeconomic consequences of fiscal consolidations whose
timing and composition are uncertain. Drawing on the evidence in Alesina and Ardagna (2010), we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts. We find that the composition of the fiscal consolidation, its
duration, the monetary policy stance, the level of government debt and expectations
over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary and/or successful in stabilizing government debt.